Regulations for the Administration of Commercial Franchising

Article 2: These Regulations shall be complied with when engaging in commercial franchising activities in the People's Republic of China.

Article 3: For the purposes of these Regulations, the term "commercial franchising" (hereinafter "Franchising" or "Franchise") means the business activity wherein an enterprise that owns registered trademarks, corporate logos, patents, proprietary technology or other such business resources (Franchiser) licenses, by way of a contract, the business resources that it owns to other business operators (Franchisees) and the Franchisees operate their business under a uniform business model in accordance with the contract and pay the Franchiser a Franchise fee.

A work unit or individual other than an enterprise may not engage in Franchising activities as a Franchiser.

Article 4: When engaging in Franchising activities, the principles of free will, equality and good faith shall be adhered to.

Article 5: The State Council's department in charge of commerce shall be responsible for regulating Franchising activities nationwide in accordance herewith. The departments in charge of commerce of people's governments of provinces, autonomous regions and municipalities directly under the central government and of people's governments at the level of city divided into districts shall be responsible for regulating Franchising activities within their jurisdiction in accordance herewith.

Article 6: Any work unit or individual shall have the right to report violations hereof to the department in charge of commerce. After receipt of such a report, the competent commercial authority shall deal with the same in accordance with the law in a timely manner.

PART TWO: FRANCHISING ACTIVITIES

Article 7: A Franchiser that wishes to engage in Franchising activities shall have a well-established business model and the capacity to provide to its Franchisees such services as business guidance, technical support and business training, etc., on a continuous basis.

A Franchiser that wishes to engage in Franchising activities shall have at least two stores that it operates directly and shall have been in business for more than one year.

Article 8: A Franchiser shall, within 15 days from the date of entering into its first Franchise contract, carry out record filing procedures with the department in charge of commerce in accordance herewith. If it is to engage in Franchising activities within a province, autonomous region or municipality directly under the central government, it shall carry out record filing procedures with the department in charge of commerce of the people's government of the province, autonomous region or municipality directly under the central government where it is located. If it is to engage in Franchising activities across provinces, autonomous regions and/or municipalities directly under the central government, it shall carry out record filing procedures with the State Council's department in charge of commerce.

When carrying out record filing procedures with the department in charge of commerce, the Franchiser shall submit the following documents and information:

(1) a photocopy of its business licence or enterprise registration certificate;

(2) a Franchise contract sample;

(3) a Franchise operation handbook;

(4) a marketing plan;

(5) a written undertaking indicating that it complies with Article 7 hereof and related supporting documentation; and

(6) other documents and information specified by the State Council's department in charge of commerce.

If, in accordance with the law, the Franchise products or services require approval before they can be dealt in, the Franchiser shall additionally submit the relevant approval document(s).

Article 9: The department in charge of commerce shall file for the record the documents and information submitted by the Franchiser that comply with Article 9 hereof within 10 days from the date of receipt of such documents and information and notify the Franchiser thereof. If the documents and information submitted by the Franchiser are incomplete, the department in charge of commerce may require it to submit the missing documents or information within seven days.

Article 10: The department in charge of commerce shall publish on the government website the list of Franchisers that have been filed on record and update the same in a timely manner.

Article 11: When engaging in Franchising activities, the Franchiser and Franchisee shall conclude a written Franchise contract.

A Franchise contract shall principally contain provisions on the following:

(1) the basic particulars of the Franchiser and Franchisee;

(2) the details and term of the Franchise;

(3) the type, amount and method of payment of the Franchise fee;

(4) the specific details of, and the method of providing, services such as business guidance, technical support and business training, etc.;

(5) the quality and guarantee measures of, and standard requirements on, the products or services;

(6) the promotion, advertising and publicizing of the products or services;

(7) the protection of consumer rights and interests and liability for damages under the Franchise;

(8) the amendment, termination and ending of the Franchise contract;

(9) liability for breach of contract;

(10) method of dispute resolution; and

(11) other matters specified by the Franchiser and Franchisee.

Article 12: The Franchiser and Franchisee shall specify in the Franchise contract that the Franchisee may unilaterally terminate the contract within a specified period of time after they have concluded such contract.

Article 13: The Franchise term specified in the Franchise contract shall not be less than three years, unless the Franchisee agrees otherwise.

The foregoing provision shall not apply when the Franchiser and Franchisee renew the Franchise contract.

Article 14: The Franchiser shall provide the Franchisee with a Franchise operation handbook and also provide on a continuous basis services such as business guidance, technical support and business training, etc. of the type and by the method agreed upon.

Article 15: The quality of, and the standards for, the Franchise products or services shall comply with the requirements of laws, administrative regulations and relevant state provisions.

Article 16: If the Franchiser requires the Franchisee to pay moneys before conclusion of the Franchise contract, it shall explain to the Franchisee the purpose of such moneys and the conditions for, and the method of, refunding the same.

Article 17: The moneys for promotion and publicity collected from the Franchisee by the Franchiser shall be used for their purpose as specified in the contract. The use of the moneys for promotion and publicity shall be disclosed to the Franchisee in a timely manner.

The Franchiser may not act in a fraudulent or misleading manner in the course of promotional and publicity activities and the advertisements released by it may not have content publicizing the returns derived by the Franchisee from engaging in the Franchising activities.

Article 18: A Franchisee may not assign its Franchise rights to a third party without the consent of the Franchiser.

A Franchisee may not divulge to a third party or permit a third party to use trade secrets of the Franchiser that it learnt.

Article 19: During the first quarter of each year, a Franchiser shall submit a report to the department in charge of commerce on the Franchise contracts it concluded during the preceding year.

PART THREE: INFORMATION DISCLOSURE

Article 20: A Franchiser shall establish and implement a sound information disclosure system in accordance with the provisions of the State Council's department in charge of commerce.

Article 21: A Franchiser shall provide to a Franchisee in writing the information specified in Article 22 hereof and the text of the Franchise contract at least 30 days prior to the date of conclusion of the Franchise contract.

Article 22: The Franchiser shall provide the following information to the Franchisee:

(1) its name, domicile, legal representative's name, amount of registered capital, scope of business and basic details on its engagement in Franchising activities;

(2) basic information on its registered trademark(s), corporate logo(s), patent(s), proprietary technology and business model;

(3) the type, amount and method of payment of the Franchise fee (including whether a deposit will be collected and the conditions for, and the method of, returning the same);

(4) the price of and conditions for the provision of products, services and equipment to the Franchisee;

(5) the specific details of services such as business guidance, technical support, business training, etc., to be provided to the Franchisee on a continuous basis, the method of provision thereof and the implementation plans therefor;

(6) the specific methods to be used in guiding and monitoring the Franchisee in its business activities;

(7) the investment budget for Franchise outlets;

(8) the number of existing Franchisees in China, their geographic distribution and an assessment of their business performance;

(9) abstracts of its financial accounting reports audited by an accounting firm and of audit reports for the most recent two years;

(10) details of Franchise-related litigation and arbitration in the most recent five years;

(11) whether it or its legal representative has a record of major illegal business operations; and

(12) other information specified by the State Council's department in charge of commerce.

Article 23: The information provided to the Franchisee by the Franchiser shall be true, accurate and complete and the Franchiser may not conceal relevant information or provide false information.

If a material change in the information provided to the Franchisee by the Franchiser occurs, the Franchiser shall notify the Franchisee thereof in a timely manner.

If the Franchiser conceals relevant information or provides false information, the Franchisee may terminate the Franchise contract.

PART FOUR: LEGAL LIABILITY

Article 24: If a Franchiser fails to satisfy the conditions specified in the second paragraph of Article 7 hereof but nevertheless engages in Franchising activities, the department in charge of commerce shall order it to rectify the matter, confiscate its illegal income, fine it not less than Rmb100,000 and not more than Rmb500,000 and publish an announcement.

If a work unit or individual other than an enterprise engages in Franchising activities as a Franchiser, the department in charge of commerce shall order it/him/her to stop its/his/her illegal business activities, confiscate its/his/her illegal income and fine it/him/her not less than Rmb100,000 and not more than Rmb500,000.

Article 25: If a Franchiser fails to carry out record filing procedures with the department in charge of commerce in accordance with Article 8 hereof, the department in charge of commerce shall order it to carry out such procedures within a specified period of time and fine it not less than Rmb10,000 and not more than Rmb50,000. If it still fails to carry out the record filing procedures within the specified period of time, a fine of not less than Rmb50,000 and not more than Rmb100,000 shall be imposed and an announcement shall be published.

Article 26: If a Franchiser violates Article 16 or 19 hereof, the department in charge of commerce shall order it to rectify the matter and may fine it at a maximum of Rmb10,000. If the circumstances are serious, the department in charge of commerce shall impose a fine of not less than Rmb10,000 and not more than Rmb50,000 and publish an announcement.

Article 27: If a Franchiser violates the second paragraph of Article 17 hereof, the administration for industry and commerce shall order it to rectify the matter and fine it not less than Rmb30,000 and not more than Rmb100,000. If the circumstances are serious, the administration for industry and commerce shall impose a fine of not less than Rmb100,000 and not more than Rmb300,000 and publish an announcement. If a criminal offence is constituted, criminal liability shall be pursued in accordance with the law.

If a Franchiser uses advertisements to act in a fraudulent or misleading manner, it shall be punished in accordance with relevant provisions of the Advertising Law.

Article 28: If a Franchiser violates Article 21 or 23 hereof, a Franchisee files a report with the department in charge of commerce and, after investigation, the allegations are found to be true, the department in charge of commerce shall order the Franchiser to rectify the matter and fine it not less than Rmb10,000 and not more than Rmb50,000. If the circumstances are serious, the department in charge of commerce shall impose a fine of not less than Rmb50,000 and not more than Rmb100,000 and publish an announcement.

Article 29: If a third party is defrauded out of its property in the guise of Franchising and a criminal offence is constituted, criminal liability shall be pursued in accordance with the law. If a criminal offence is not constituted, penalties shall be imposed by the public security authority in accordance with the PRC Law on the Imposition of Penalties in Connection with the Administration of Law and Order.

If pyramid selling is engaged in in the guise of Franchising, penalties shall be imposed in accordance with relevant provisions of the Regulations on the Prohibition of Pyramid Selling.

Article 30: If a member of the working personnel of the department in charge of commerce abuses his/her authority, is derelict in his/her duties or commits irregularities for private ends and the same constitutes a criminal offence, his/her legal liability shall be pursued in accordance with the law. If a criminal offence is not constituted, he/she shall be sanctioned in accordance with the law.

PART FIVE: SUPPLEMENTARY PROVISIONS

Article 31: If Franchising activities involve trademark or patent licensing, matters shall be handled in accordance with relevant trademark or patent laws and administrative regulations.

Article 32: Relevant associations shall formulate rules for Franchising activities in accordance herewith under the guidance of the State Council's department in charge of commerce, strengthen self-regulation of the industry and provide relevant services to concerned parties involved in Franchising activities.

Article 33: Franchisers that have been engaging in Franchising activities prior to the implementation hereof shall carry out record filing procedures with the department in charge of commerce in accordance herewith within one year from the date of implementation hereof. Failure to carry out record filing procedures by the specified period of time shall be punished in accordance with Article 25 hereof.

The second paragraph of Article 7 hereof shall not apply to the Franchisers specified in the preceding paragraph.

Article 34: These Regulations shall be effective as of May 1 2007.